Cutting edge: solutions for three-asset spread options
Three-asset spread options are becoming increasingly important in energy and commodity markets. Elisa Alòs, Alexander Eydeland and Peter Laurence present two fast asymptotic, analytic pricing formulas. The first is based on a new stochastic calculus technique called the decomposition method and is a direct generalisation of the famous Kirk’s formula for three assets. The second is based on Laplace approximation and Bachelier’s formula
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